Margin models are different in nature from capital models. Risk-based margin models need to provide results, which run in time for morning margin call processes, and they also need to be transparent and amendable to dispute reconciliation. Moreover, the risk-based margin models need to run quickly so that users may be able to understand, for example, liquidity implications of potential trades and so that dispute causes can be promptly analyzed and resolved.
The Working Group on Margin Requirements (“WGMR”), an initiative run by the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”), issued a final margin policy framework in 2013 for non-cleared, bilateral derivatives. Individual regulatory authorities across jurisdictions have started to develop their own margin rules consistent with the final framework.
Unlike the calculation of variation margin, which may be based on day-to-day valuation changes that are often directly observable, initial margin calculations largely may depend on the choice of model and the assumptions used. Under the framework set by the WGMR, firms can use their own internal models to calculate initial margin, as long as they meet certain criteria and obtain regulatory approval. However, the significant discrepancy and variance among the different internal models may raise various compatibility issues as well as inaccuracies.
In that regard, there is a need for an initial margin model for non-cleared derivatives, which may be used by market participants globally to provide a standard methodology and also to permit transparent dispute resolution while allowing consistent regulatory governance and oversight.
There is a further need to provide common classifications for the initial margin models for uncleared derivatives so that consistent implementation of the models may be achieved.